Bonus Depreciation

What the rule says now

Bonus depreciation is an extra first-year deduction for qualifying business property. Under the 2017 tax law it was 100%, then it fell by 20 points a year. The One Big Beautiful Bill Act (Pub. L. 119-21) restored it to 100%, with no scheduled end date, for qualifying property acquired after January 19, 2025 and placed in service after that date.

Property acquired on or before January 19, 2025 stays on the old phase-down schedule: 40% for property placed in service in 2025, 20% in 2026, and nothing afterward. So the acquisition date matters. A machine you signed a binding contract for in 2024 and put into service in 2026 gets 20%, while an identical one you ordered in March 2025 gets 100%.

Bonus depreciation is automatic unless you elect out. You can elect out by class of property (for example all 5-year property) for a given year, which is useful when a large first-year deduction would waste low tax brackets.

What qualifies

Qualifying property is generally tangible property with a recovery period of 20 years or less under MACRS: machinery, equipment, computers, furniture, vehicles, and many land improvements. It also covers computer software that you buy off the shelf and qualified improvement property, which means interior improvements to nonresidential buildings you place in service after the building itself.

Used property can qualify. It must not have been used by you or a predecessor before, it must be purchased from an unrelated party, and your basis can't come from other property you already held. Buildings and land do not qualify. Nonresidential real property used in manufacturing, production or refining may be eligible for a separate 100% expensing rule if construction begins after January 19, 2025 and before 2029.

Vehicles need attention. A passenger car, truck or van under 6,000 pounds gross vehicle weight is subject to annual depreciation caps, which for 2026 limit the first-year total, including bonus, to $20,300 (Rev. Proc. 2026-15). Heavier vehicles above 6,000 pounds escape most of that cap, and a heavy SUV has its own Section 179 limit of $32,000. Vehicles also need more than 50% business use to qualify for accelerated deductions.

Worked example: $150,000 of equipment

A business buys a $150,000 machine in 2026, new, 7-year MACRS property, and places it in service that year. Compare regular MACRS depreciation with bonus depreciation.

Both columns add up to $150,000. Bonus depreciation changes the timing, not the total. At a 24% federal bracket, the year-one deduction is worth $150,000 × 24% = $36,000 with bonus, against $21,435 × 24% = $5,144 without it. The business gets $30,856 of extra cash in year one and, in exchange, has no depreciation left to deduct in years two through eight.

That trade is attractive when tax rates stay steady or rise, and less attractive when you expect a much higher bracket later, because the deductions you gave up would have been worth more then. It also depends on having income to absorb the deduction. See how it plays out on your own numbers with the Section 179 calculator.

Bonus depreciation versus Section 179

The two provisions overlap, and most businesses can use both. They differ in the rules that limit them.

Section 179 is targeted: you choose which assets and how much, and the deduction can't exceed your business income for the year. Bonus depreciation is broad and can produce a net operating loss. Because Section 179 comes first in the ordering, a common approach is to elect it on the assets you want to fully deduct and let bonus cover the rest. Our guide to Section 179 versus bonus depreciation walks through when each one fits, and Section 179 has its own entry.

If bonus depreciation creates a loss, it is generally carried forward as a net operating loss, and the deduction against future income is limited to 80% of taxable income. A large deduction that you can't use this year might just defer the benefit.

The catch: recapture when you sell

Depreciation lowers your tax basis in the asset. If you sell equipment for more than its remaining basis, the gain up to the depreciation you claimed is taxed as ordinary income, not as a capital gain. This is depreciation recapture.

Take the $150,000 machine. With full bonus depreciation its basis is $0. If the business sells it three years later for $60,000, the entire $60,000 is recaptured as ordinary income. Without bonus depreciation, the tax basis after three years of MACRS would be $150,000 − $21,435 − $36,735 − $26,235 = $65,595, so the same sale would produce a $5,595 loss instead of a $60,000 gain. Recapture is the reason a big early deduction is a deferral rather than a permanent saving. Estimate the effect with the depreciation recapture calculator.

Common mistakes

• Using the wrong acquisition date. The 100% rate depends on when you acquired the property, not just when you placed it in service. Check the contract or purchase date.
• Claiming the deduction on a vehicle that fails the business-use test. Business use of 50% or less means the accelerated deductions are not available for the vehicle.
• Deducting more than you can use. A loss carried forward has value, but it can sit for years. Compare it with just electing out for the year.
• Forgetting your state. Several states do not conform to federal bonus depreciation, so a return can show a federal deduction and no state one. Keep separate depreciation schedules.
• Ignoring recapture in the plan. If you expect to sell or trade the asset soon, the deferral may not be worth much.
• Treating it as a way to get a tax refund on a purchase you did not need. A deduction saves tax only in proportion to your bracket. Spending $150,000 to save $36,000 still costs $114,000.

What this page can't tell you

The rules above apply to federal income tax for 2026 and simplify several details, including the mid-quarter convention, short tax years and the treatment of listed property. Related items such as the passenger automobile caps are updated each year by the IRS. Check the current figures and get a tax professional's view before making a large purchase for the deduction.

Frequently asked questions